"Against the backdrop of the financial shocks that have beset the
economy and their implications for the outlook, the reduction in the
funds rate target appears wholly appropriate," he said in remarks
prepared for delivery to the Financial Planning Association of
Minnesota.

The Fed is responsible for restoring financial stability and protecting the broad economy from damage, Stern said.

"Policy is now better positioned to attain these objectives than formerly," he added.

Stern said the current situation is reminiscent of the early 1990s,
when the economy faced "headwinds" after the 1990-91 recession,
particularly tighter credit and a real estate bust.

"In this environment, we need to remain sensitive to evolving
financial conditions and to incoming information on business activity
in order to further determine the relevance of that earlier
experience," Stern said.

It is possible that an appreciable tightening of credit conditions
could restrain the economy for a time, the Minneapolis Fed president
said. He expects economic growth to average 2.5 percent a year over the
long run, he added.

Meanwhile, the possibility of a credit crunch cannot be ruled out, he added.